The Reserve Bank of India recently directed several banks to start insolvency resolution proceedings against a list of identified companies, including Jaypee Infratech Limited, a leading real estate development company. The case has highlighted the need for the Insolvency and Bankruptcy Code 2016 to recognise a wider class of creditors that can initiate an insolvency proceeding and participate meaningfully in such process. It has also emphasised the important role that financial creditors play.
With the enactment of many of the provisions of the Insolvency and Bankruptcy Code and regulations therein, the code has been sufficiently developed to operate in practice and provide speedy resolutions to companies undergoing a debt crisis. Further, the remarkable pace of the code's implementation in the past six months reflects the central government's commitment to making the code operational as soon as possible.
Following the establishment of the Insolvency and Bankruptcy Board, the government has taken concrete steps to expedite the implementation of the Insolvency and Bankruptcy Code 2016. In particular, the government has appointed members to the Insolvency and Bankruptcy Board and released draft rules and regulations. These are positive steps towards achieving a fully functional insolvency and bankruptcy regime encapsulated under the code.
As part of the ongoing overhaul of the insolvency regime, the government recently notified certain provisions of the Insolvency and Bankruptcy Code 2016 that deal with the Insolvency and Bankruptcy Board of India's constitution and the appointment of its members and passed the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill 2016 in both houses of Parliament.
From an investor's standpoint, a robust and effective bankruptcy regime is a prerequisite for the development of the corporate debt market. However, the existing insolvency and bankruptcy framework is highly fragmented. In order to resolve this serious issue, the government recently enacted the Insolvency and Bankruptcy Code 2016, which essentially consolidates the existing legal regime for insolvency and bankruptcy proceedings in India.
The National Company Law Tribunal (NCLT) was recently announced as the adjudicating authority for insolvency proceedings relating to companies, limited liability partnerships and other body corporates under the Insolvency and Bankruptcy Code 2016, with effect from June 1 2016. The National Company Law Appellate Tribunal, which will hear appeals from NCLT decisions, has also been established.
The Insolvency and Bankruptcy Code 2016 was recently passed by the upper house of Parliament. The code is expected to be approved by the president in the coming days and with it, the much-awaited overhaul of India's cumbersome laws for insolvency and bankruptcy proceedings will officially be in place. The code will serve as a landmark to improve the ease of doing business in India and improve India's ranking in the World Bank's index for ease of doing business.
There has typically been significant confusion around the interplay between various laws relating to the rights of creditors and borrowers, specifically with regards to the protection of sick industrial companies. A recent Supreme Court decision clarifies that the right of secured creditors to enforce securities to recover outstanding dues without court intervention overrides other legislation that touches on the rights of creditors and borrowers.
A division bench of the Supreme Court recently held that a company court (through the official liquidator) cannot wield any control in respect of a sale of secured assets by a secured creditor in exercise of powers available to the creditor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act. The decision clarifies the position of law and reconciles conflicting decisions from several high courts.
The Bankruptcy Law Reforms Committee recently recommended the passage of the Insolvency and Bankruptcy Code 2015. The code is a welcome initiative for creditors, investors and debtors alike. The streamlining of procedures, simplification of the insolvency process and fast-tracking of recovery are hallmarks of the code which, if passed, will have a palpably positive affect on India's lending climate.